Audit Report of Success Academy Charter Schools-NYC’s Oversight of Financial Operations

Executive Summary

The objectives of the audit were to determine whether Success Academy exercised adequate oversight over its schools’ fiscal affairs and maintained a system of internal controls sufficient to ensure that expenses were reasonable, appropriate, adequately supported, and authorized; that transactions were accurately recorded and reported; and that potential conflict of interest and related party transactions were monitored and prevented where necessary.

Charter schools are independent public schools operated by not-for-profit corporations that are governed by boards of trustees and managed under contracts with government authorizers, also known as “charter agreements.”  The authority to establish charter schools in New York stems from the Charter Schools Act of 1998, Article 56 of the New York State Education Law (the Charter Schools Act).  Pursuant to the Charter Schools Act, in order for a charter school to be created in New York City, it must have been approved by one of three possible authorizing entities: the Board of Trustees of the State University of New York (SUNY); the New York State Education Department (NYSED); or the New York City (City) Department of Education (DOE).  Pursuant to § 2853(1)(d) of the Charter Schools Act, “the powers granted to a charter school under [the Charter Schools Act] constitute the performance of essential public purposes and governmental purposes” of the State of New York.

Success Academy Charter Schools-NYC (Success Academy) is an educational corporation that is authorized by SUNY to operate multiple charter schools under its Third Amended and Restated Second Renewal Charter dated October 31, 2014 (the Charter Agreement).   Success Academy served 8,715 students enrolled in kindergarten through ninth grade at 24 different schools in Fiscal Year 2015.

During the audit period, Fiscal Years 2013 through 2015 (July 1, 2012, through June 30, 2015), Success Academy was party to an Academic and Business Services Agreement (Management Agreement) with Success Academy Charter Schools, Inc. (the Network), an educational service provider retained to manage the operations of Success Academy’s multiple schools.  Although Success Academy (the entity that employs the teachers and operates the schools) and the Network (the entity that pursuant to contract oversees the operational and financial affairs of the schools) are both named “Success Academy” (Success Academy Charter Schools-NYC in the case of the educational corporation, and Success Academy Charter Schools, Inc. in the case of the Network), in order to distinguish between the two in this report, we refer to the educational corporation as “Success Academy” and the management company as “the Network.”

This audit is of Success Academy (the educational corporation).  Based on a broad review of Success Academy’s financial practices and controls, Success Academy’s Harlem 3 charter school was chosen for certain detailed testing.  Pursuant to the Management Agreement, the Network is responsible for most aspects of the management and operations of the schools.  Accordingly, much of the information necessary to complete the audit was obtained from the Network.  The Management Agreement authorized Success Academy to pay the Network 15 percent of the final adjusted expense per pupil.  For Fiscal Year 2015, Success Academy reported that it paid the Network management fees of $18.3 million.  As required by Section 2.4 of the Charter Agreement, SUNY reserves the right to review and disapprove the Management Agreement and any amendments or renewals thereto.

Audit Findings and Conclusion

Success Academy made duplicative payments to the Network totaling $624,342 for services the Management Agreement required the Network to provide in exchange for its 15 percent management fee.  Further, Success Academy incorrectly classified some of its expenses—specifically the management fee it paid to the Network—in its Fiscal Year 2015 certified financial statements and in the Harlem 3 annual charter school report card submitted to SUNY.  Through those incorrect classifications, Success Academy significantly understated its administrative expenses and overstated its program services expenses, which made it appear that a much greater percentage of Success Academy’s expenses went towards program services than was actually the case.

In addition, the audit found the following:

• Success Academy billed DOE $50,825 for special education services for 6 out of 21 sampled students (28.6 percent) at Harlem 3 that were not documented in Success Academy’s records as having actually been provided.
• Success Academy did not maintain adequate controls over $24.8 million in inventory.
• Success Academy’s records did not show that the organization consistently met the following standards:
  • that purchasing expenses were reasonable, appropriate, adequately supported, and properly authorized;
  • that it obtained appropriate proof of residency for students;
  • that its employees always had required fingerprints and background checks completed and cleared before they began working in its schools; and
  • that it properly documented and obtained approval for $8.5 million in loans from a related party in accordance with applicable rules.

Finally, the Success Academy Board of Trustees failed to adequately monitor some aspects of the financial affairs of Success Academy and did not consistently follow the procedures for operation required by its bylaws.

Audit Recommendations

Based on our findings, we made 28 recommendations to Success Academy, including the following:

• Success Academy should recoup the $624,342 paid to the Network for expenses charged to Harlem 3 and other Success Academy schools that should have been included in the Network’s management fee.
• Success Academy should comply with generally accepted accounting principles and NYSED guidelines and develop, document, and utilize functional expense allocation methodologies that are fair and reasonable.
• Success Academy should reimburse DOE for special education services that were not provided at all or were not fully provided.
• Success Academy should employ key internal control practices for inventory as specified in the NYSED Fiscal Oversight Guidebook.
• Success Academy should ensure that Network and Success Academy employees comply with its policies and procedures related to purchasing; competitively procure goods and services or document the basis for sole source procurements; obtain required purchase authorizations and maintain procurement, contract, purchasing, and payment records.
• Success Academy should ensure that credit cardholders comply with its policies and procedures; purchase only goods and services that are budgeted, authorized, essential, and within spending limits; do not pay sales tax on exempt purchases; review purchases in a timely manner; and provide adequate supporting documentation for purchases.
• Success Academy should ensure that it maintains appropriate proof of residency for all students.
• Success Academy should ensure that it obtains required fingerprint and background clearances for employees before allowing them to work at its schools. If circumstances exist such that a person must be hired before a clearance is obtained, Success Academy should obtain a conditional or emergency conditional clearance for that person prior to the employee’s start date.
• Success Academy should memorialize all past and future loan agreements between Success Academy and the Network in writing.
• Success Academy should comply with its Charter Agreement and submit proposed written agreements between Success Academy and the Network and associated legal opinions to SUNY not later than thirty (30) days prior to the proposed date of execution.

Auditee Response

On December 2, 2016, we requested that Success Academy formally respond to the audit’s findings and recommendations by December 16, 2016.  On December 16, 2016, we received a response to the audit accompanied by 982 pages of additional documents.  Success Academy objected to the conduct of the audit, disagreed with most of the findings, and did not respond to any of the audit recommendations.